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Blain’s Morning Porridge, by Bill Blain

Will the agreement on global tax ever become a reality? and the real threat of financial asset inflation!

“The stock market is a very expensive place to discover you know nothing…”

This morning: The G7 agreement is being hailed as a great step forward, but will it ever happen? Janet Yellen’s call for higher rates is a clear sign the problem of financial asset inflation will finally be addressed – the question is how painful the treatment and taper tantrum will be? Not addressing financial asset inflation is a far bigger risk than the debt crisis many monetary traditionalists perceive has grown from government pandemic spending.  

Welcome to another week of consequences, mayhem and fun on global markets…

What a great time to be a tax-accountant! The G7 agreement on a “minimum corporate rate of 15%” will have accountants, tax-planners and bankers in a euphoric state as they anticipate dissecting the deal’s underpinnings with a fine comb, look for the back doors, engage lobbyists to push for advantageous clauses, and get set to arbitrage every facet of it – if it ever happens and becomes a reality.

If any European country ever receives anything close to a check for 15% of the profits made by a big digital tech company selling in their borders, I shall eat my hat. I’ve already heard there is a note from an accounting firm suggesting Amazon can wriggle out because of the marginal cost calculations… whatever… something to with governments getting “the right to tax 20% of profits exceeding a 10% margin” – which sound much less than 15% of profits to my mind.

But, of course, it’s a win/win for everyone.

The Sherpas of global finance – like Janet Yellen – are on the wires saying it’s a revival of “multilateralism” as nations come back together in the post-Trump era to solve “critical challenges facing the global economy”.

The Politicians are all over it like a rash – looking forward to all that loverly US tech money to spend… while claiming to have righted a massive historical wrong in the lack of cash paid by many firms. The French, of course, are complaining 15% is not enough; Macron looking to demonstrate his fraternity with the working class voters by pushing for more.

And the corporates…? They will be delighted.. A chance to show they support the good cause, while behind the scenes they keep emptying our wallets.

National tax agencies won’t bat an eyelid. They know better than to go for the big tech firms. To heavily tooled up with the best tax-lawyers.. much easier to go from small businesses who tend to cave quicker to HMRC threats…

But will the agreement ever happen?

On the face of it, the Irish should not be happy. They aren’t even a G20 member – except as being part of the EU. They are putting a brave face on it, with comments like their low-tax economy will continue to attract jobs, and why would any already established there leave? Many corporates won’t feel any urgency to move their operations. Many may decide to beef them up in the expectation any tax deal is still years away from full ratification by all the members of the OECD, and that it may not happen at all… ever. Dublin office space may still be a good bet…

The reality is the new G7 minimum tax proposal is going to struggle to get through the slough of despond that is deepening US political gridlock. The Republicans are already parroting Trump that such a deal can’t be good for US Company revenues, therefore should be rejected.

What will the G7 tax deal mean for markets?

It’s going to be a busy time for the credit agencies, figuring out if the shock horror of corporate’s actually paying taxes in countries where they sell stuff, pushes a few names down a credit notch or two because paying taxes comes before paying bondholders. I’d be surprised if they find many lame ducks – but the credit agencies won’t miss the opportunity to be relevant, and will no doubt start pumping out research for bond managers to fall asleep over.

What about company profits – the stuff that (once) so excited Equities? As one wag once pointed out: “if you’re paying taxes on profits, you ain’t doing it right.” Better spend the money on acquisitions, on infrastructure, etc… heaven forbid paying staff better. But company spending is an economic multiplier – so it’s a good thing.

That leaves an interesting thought: what about all the US Tech firms now sitting on enormous cash piles, built up from untaxed profits channelled through corporate headquarters in nations willing to charge zero taxes – like Ireland? Retroactively taxing these untaxed gains isn’t on the agenda, and will never ever happen….

Meanwhile, a much larger issue looms in terms of taper-time….

Over the weekend we had a very interesting intervention from Janet Yellen as she toed the President Biden line, supporting $4 trillion of infrastructure spending – even if it does trigger inflation, and called for higher interest rates. “If we end up with a slightly higher interest rate environment it would actually be a plus from society’s point of view and the Fed’s point of view.”

Yellen’s comments struck me as a very Significant Moment. It’s an acknowledgement the Biden Administration understands the need to taper the monetary excesses of the past few years. Sure, that will trigger a taper-tantrum – which everyone believes is nailed on when rates edge higher. A market collapse would cause a massive blink in confidence – but … so what? Everyone knows markets are overpriced – so why not acknowledge rates should normalise to levels where it might make sense for investors to start buying US treasury bonds, rather than just the Fed?

The reality of the last 12 years is there has already been massive and uncontrolled inflation in financial assets on the back of experimental monetary policy. Zero interest rates and essentially unlimited money via QE and pandemic money, has pushed up stocks and bonds to massively elevated levels – levels which now spell danger for market stability, yet continues to drive the massive game of “chicken” that the markets have become.

(By “chicken” I mean the explosion in speculative investment; in names unlikely to ever make significant profits, in meme stocks, in zeitgeist funds, and fantublations like Bitcoin – every single one of them is founded not in future investment values and profits, but the belief that a greater fool will emerge to buy them at a higher price.)

Meanwhile, we’ve got monetary traditionalists screaming foul at the apparent fiscal excesses that have occurred since the Pandemic began last year. Governments and Central banks correctly understood the need for massive fiscal stimulus and handouts to sustain economies in immediate crisis, and built springboards for the spectacular growth we are now seeing in the UK economy and US jobs. The fiscal carpet bombing has worked saving the economy, but debt has ballooned.

But what do we hear from the Right? That all that debt is crushing confidence in fiat money, that state handouts are causing lazy workers to withdraw their labour, and the devaluation of currencies will cause the collapse of the west. It’s become the clarion call of Libertarian Cryptocurrency supporters – who perceive that their mythical digital asset’s being free of government control is it major advantage…

Markets love to panic about the worst possible outcomes – which never ever occur. The reality is global markets, interest rates, currencies and dent levels are in an awful mess – but that’s not unusual. It’s just the way it is.. We will undoubtedly muddle through. … but it might be bumpy at times.

Rather than the amount of national debt, the massive inflation we’ve seen in financial assets has become the real major problem – because its thrown so many aspects of the economy out of line. Because financial assets are now so expensive they cause investors to seek better returns from cheaper assets, pushing up the prices of real assets as a result.

We can see that clearly in property markets where is it now inconceivable that a normal worker can ever afford a house. That then changes economic behaviours – millennials and GenZ give up on acquiring homes, and without the pressure of mortgage payments or kids, don’t see the need to work as hard… etc etc.. That has consequences for the future in terms of demographics – who pays?

I don’t particularly fear the debt-driven monetary apocalypse many observers increasingly fear. All countries have been fiscal inflating their economies to drive pandemic recovery. If confidence in a particular currency is rocked it will occur because of reasons like political failure – which is my concern about the US. Meanwhile, there is no shortage of capital to fuel growth – it’s a question of how much of its squandered on things like stock buybacks and other drivers of inequality.

My concerns are much more about real threats; like just how deeply entrenched financial inequality across society has become because of financial asset inflation – and how that eventually damages and destabilises societies. The instability is being fueled by polarisation magnified by social media – which is what’s fueling all the libertarian conspiracy theories about mind-stealing aliens, big-government failure, and the safety of the crypto-con.

Downdetector users report Reddit is experiencing issues and or outages nationwide. Besides Reddit, there are other websites that are down. 

A search for “Reddit.com” comes up with “Error 503 Service Unavailable” 

Problems at Reddit began around 0600 ET. 

Downdector also reports multiple websites are down. 

This is terrible news for wallstreetbets traders waking up Tuesday morning, unable to pump meme stocks like AMC and GME. 

A week ago, none other than Larry Fink poured an illiberal amount of cold water on the current inflationary narrative being spewed by Powell, Yellen, and their lackeys in academia.

The Blackrock CEO – who happens to manage more than The Fed at last check – countered soothing talk that soaring prices are here and gone tomorrow, and said that investors may be underestimating the potential for a spike in inflation.

“Most people haven’t had a forty-plus year career, and they’ve only seen declining inflation over the last 30-plus years. So this is going to be a pretty big shock”, Fink said, his warning falling on deaf ears.

Alas, unlike the Fed, Fink actually know what he is talking about: he began his career at First Boston Corp. in 1976, in during runaway US inflation, with the Consumer Price Index hitting a high of 14.8% in March 1980, and forcing Volcker to hike rates as high as 20%.

Treasury Secretary Yellen was quick to dismiss this fearmongering malarkey by claiming that while she may, possibly, kinda, sorta see higher prices, it will be transitory (because The Fed is awesome) and besides, America… it’s all good!

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said in an interview with Bloomberg. And yes, she really said that.

Is this a joke: the BIden budget sees 2.1% CPI in 2021 and 2022

— zerohedge (@zerohedge) May 28, 2021

That is very much not the mantra that Roger Bootle, who – a quarter century after writing the book on the death of inflation – is now warning that he is seeing signs of its reignition.

“It is the start of a sea change, I have to say. That’s not to say that we’re going to go back to the strong inflationary conditions of the 70s and early 80s. But at the very least, I think we are at the end of the crypto-deflationary period that we’ve been in for the last few years.

“The danger of deflation has passed, and the risks have definitely tilted in the other direction. How high inflation will go, and for how long, that’s debatable. But I’m not in much doubt myself that there’s been a sea change.”

However, for the real worry-warts, Bootle does not expect 1970s-style inflation…

“No, the comparison with the 1970s is not a good one. If you look at the long term history of inflation, and I’ve looked at the U.K. data going back to the 13th century, you don’t get ever a sustained period of inflation of the sort we had 1970s. You do get bursts of inflation, typically followed by much lower rates or even deflation.

“The 1970s were special. First of all, you started off at a quite a high base rate of inflation. And then several shocks appeared, two oil price shocks. The settings of monetary and fiscal policy were extremely loose. And all of this in an institutional context that was conducive to inflation — very powerful trade unions, powerful corporations, a high rate of public ownership in this country and many others.

“A closer comparison is with the 50s and 60s before the inflationary take off at the end of the 60s. We then went through a long, a prolonged period of what seemed at the time by the way to be quite high inflation — we learned subsequently it wasn’t.”

So, to summarize, in the last month or so the official narrative has shifted from inflation will be “transitory” to “inflation is good for society”…

… and the beneficiary is (drum roll please): the environment.

As Bootle explains:

“If I had to put my money on a single factor that was going to push up costs in the years to come, I would say it was the environmental emphasis and in particular the drive towards net-zero. This is going to lead to a whole series of costs and price increases across the economy.”

His explanation fits with Fink’s previous climate change view on higher prices…

“If our solution is entirely just to get a green world, we’re going to have much higher inflation, because we do not have the technology to do all this, yet,” Fink said.

“That’s going to be a big policy issue going forward too: Are we going to be willing to accept more inflation if inflation is to accelerate our green footprint?”

And don’t bank of the bankers to save the world…

“I’m not sure complacency is quite the right word. I think it’s over-optimism with regard to inflation, but on two counts. One that’s it’s not going to go up that much, at least not sustainably. And two, if it does, as and when they need to, they’re going to be able to contain it.

“Policymakers have a natural inclination to lay off and think it’s all going to get sorted out. I think actually the conclusion ought to be quite the opposite. Because of the dangers, in this world, of big rises in interest rates, they ought to start rising raising interest rates sooner and moving by low amounts stealthily, in order to get interest rates up somewhere near a more normal level rather than being forced into it.”

All of which dismantles Yellen’s extreme overconfidence that monetary policy makers can handle any potential rise in inflation if it sticks. “I know that world – they’re very good,” Yellen said in the interview. “I don’t believe they’re going to screw it up.”

This is the same clueless hack who in 2017 said she doesn’t expect another financial crisis in “our lifetimes.”

Authored by Jason Ditz via AntiWar.com,

20 years into the US war in Afghanistan, the troops are going to leave, and the CIA is going to stay. The question right now is how that’s going to happen, and where exactly the agency is going to be basing its operations from.

There is no question that the CIA will be spying, and carrying out strikes in Afghanistan, but after decades mostly doing things out of US bases in Afghanistan, they’re going to need to find a new base, and there is no obvious choice.

Officials are describing “last-minute” efforts to find bases to operate from, which probably shouldn’t be so last-minute since the pullout has been a deal in place since at least early 2020, and could be seen coming well before that.

Pakistan is seeing consideration, as the CIA used to have a base there for their drone war. The US and Pakistan aren’t on such good terms now, however, and Pakistan reportedly wants to be able to sign off on who the CIA is attacking from their territory.

There is also a report that the CIA could try to find a host in a former Soviet republic north of Afghanistan. The upside is that those nations would be less inclined to try to manage CIA assassinations, but diplomats say they expect Russian President Vladimir Putin to oppose the idea.

CIA Director William Burns says that whatever happens, the end of US troops in Afghanistan will diminish the CIA’s ability to act there. The US clearly isn’t going to give up, wanting to maintain its ability to conduct strikes around the world, but it’s going to be complicated.

Coming off last month’s eleven day Gaza war in which there were persistent fears that a ‘northern front’ would open against Israel if Hezbollah joined the fray (and after multiple missiles launched from southern Lebanon reportedly by Palestinian factions in the country), Israel’s Defense Minister Benny Gantz has warned that the next potential war in Lebanon will see “overwhelming force” used. 

The words were given at a ceremony marking Israel’s official recognition of the army’s 18-year occupation of southern Lebanon, which is now considered an official military campaign. Referencing the devastating latest strikes on Gaza, which killed almost 250 Palestinians – many of them children – Gantz said the campaign was “only the tip of the iceberg” in terms of military capabilities and what Lebanon’s Hezbollah would face next. 

“Whoever hides weapons in their house endangers their children,” the defense minister added, in an apparent acknowledgement of the high civilian death toll especially impacting children. 

Despite continued high tensions and a state of standoff between Palestinians and Jewish settlers in Jerusalem, particularly over evictions in the Sheikh Jarrah neighborhood, an uneasy Hamas-Israel truce has held since May 21.

In response to these latest threats out of Israel, Iranian state media quoted a senior Hezbollah representative who vowed that any aggressors would be met with the “fire of hell” in the instance of an invasion or attack.

“They (Israelis) should not err in their calculations again,” the official, identified as Hassan Baghdadi said. “If there is a war with Hezbollah, they will see the fire of hell as they have never imagined.”

During the 2006 war Israel took the fight far beyond southern Lebanon, where it was battling Hezbollah militants, and bombed the capital of Beirut – even including the international airport there and other civilian infrastructure across the country.

Authored by Irina Slav via OilPrice.com,

Gamma-ray bursts are the most powerful, brightest explosions in the universe.

They last only seconds but release immense amounts of energy – as much, in fact, as the sun will emit throughout its existence. According to scientists, there may be a way to imitate the process that leads to this explosion in what could be an energy industry game-changer. 

Gamma-ray bursts (GRBs) are believed to occur when a black hole is formed. The first was observed in 1967, but it was only in 1991 that the Compton Gamma Ray Observatory with the Burst and Transient Source Experiment (BATSE) was launched. BATSE has been discovering roughly one gamma-ray burst daily. Now, the most powerful gamma-ray burst may have given scientists the key to replicating it.

GRB 190114C, Science Alert writes, came from 4.5 billion light-years away and generated energy of some trillion electron volts. You don’t need to be versed in electricity measures to grasp the magnitude of the burst: if it’s got a trillion of anything in it, it’s bound to be powerful.

Earlier this year, scientists from Columbia University and Universidad Adolfo Ibáñez in Chile reported that they had discovered a way to harvest energy from black holes by separating and rejoining magnetic lines along the event horizon—the so-called point of no return where black holes suck in everything and not even light can return.

This disconnection and reconnection process, the researchers said, could accelerate plasma particles around the black hole to negative energy. This, in turn, would generate massive amounts of energy that could be extracted.

Now, a team from the International Center for Relativistic Astrophysics Network (ICRANet), an organization headquartered in Italy, says it had uncovered the mechanism that leads to gamma-ray bursts.

They’re calling it a binary-driven hypernova, which is a system of two stars, one carbon-oxygen star and a neutron star. The carbon-oxygen star is nearing the end of its life, and when it becomes a supernova, which is how stars die, it ejects material that the neutron star absorbs, which causes it to pass the critical mass point and turn into a black hole. The process of this happening causes gamma-ray bursts.

That’s the theory, but the team, led by Rahim Moradi, has also described how the process can be replicated. This comes down to particle acceleration along magnetic lines, which extracts rotational energy from the black hole’s ergosphere: a region where the space-time continuum is rotating so fast that every object spins in the same direction as the black hole.

“The novel engine presented in the new publication makes the job through a purely general relativistic, gravito-electrodynamical process: a rotating black hole, interacting with a surrounding magnetic field, creates an electric field that accelerates ambient electrons to ultrahigh-energies leading to high-energy radiation and ultrahigh-energy cosmic rays,” explains one of the authors of the research, Remo Ruffini, as quoted by Science Alert.

It probably sounds far-fetched and too theoretical to have any practical implications. Yet black holes have captured the imagination of scientists ever since their existence was only theorized. Then they were proven to exist. Some half a century ago, a British mathematical physicist, Roger Penrose, described a future where humans or aliens would be able to harvest the energy of a black hole by dropping an object in its ergosphere and accelerating it to negative energy. Last year, scientists from the University of Glasgow devised a proof-of-concept for the process.

In other words, what seemed like a fantasy decades ago turned out to be an actual phenomenon and what sounded an impossible way to use this phenomenon to extract energy fifty years ago is hypothetically possible now. Perhaps replicating a gamma-ray burst may become possible too.